Start Planning for 2015 Income Taxes Now: 5 Tips
Even if your 2014 refund hasn’t hit the mailbox yet, it’s time to get a jump on your 2015 taxes.
What does the phrase “tax planning” mean to you?
- Hurriedly giving charitable donations in December to try to knock down your total income tax obligation
- Setting aside time for tax preparation as soon as your tax forms come in after the first of the year
- Making tax planning a year-round element of your larger financial planning
There’s nothing wrong with the first two here, but we also hope you’re practicing #3. If not, here are five ways you can do that.
Run your financial reports conscientiously.
Figure 1: Reports are a critical part of your year-round tax planning. We can create and analyze the standard financial reports you’ll need.
All of that hard work you do entering transactions and receiving payments conscientiously pays off in reports that can help you make better business decisions for your dental practice every day. But reports are also an important element of your tax planning. There are many simple ones that you’ll want to generate regularly to keep an eye on your income and expenses, but some, like the Trial Balance and Statement of Cash Flows, are more complex and can require a professional’s interpretation.
If you’ve not already done so, talk to us about setting up a regular schedule for these standard financial reports, either monthly or quarterly. We can explain how the insight you receive can have an impact on your tax obligations.
Consider your “green” options. Energy conservation is not just a good idea — it can help you save money on your taxes. The government makes a number of energy credits available to businesses and consumers who install and use products that are energy efficient. You can get more information here.
Watch expenses like the proverbial hawk. Business expenses will offset your income and help you lower your tax bill, but they need to be the right expenses. And they need to be documented comprehensively and accurately.
Technology can be your friend here. There are applications that help you rein in travel expenses, for example. You can lay out your policies within them, and they will flag expenses that are out of your reimbursable and/or billable range. Others help you track and manage receipts. There are also numerous time-and-billing applications that will help you ensure that all hours worked are recorded and billed back to the appropriate customers.
These solutions are easy to use and inexpensive, and they can help you trim the fat and charge your customers for the expenses you incur for them. We can help you explore and implement what’s available.
Are you getting too much of a refund, and you’re tired of loaning the government your money without getting any interest? Or conversely, are you having to pay too much at filing time? Evaluate your withholding to determine whether you should be claiming more or fewer allowances. You can talk to us about this. If you need to complete a new Form W-4, you can find one here.
Figure 2: Allowances are often the culprit if you’re regularly receiving a large refund or you frequently have to pay at filing time. We can help you evaluate your situation.
Use a recommended small business or dental accounting product. Whether it’s desktop software or a cloud-based solution, there’s simply no reason why you should still be using Excel and paper. You need solid financial information year-round that culminates in a thorough, accurate set of forms and schedules come tax time. In fact, your income tax obligation is good enough reason to invest a modest amount of money and some training time to automate your finances. There are many other benefits, but tax planning is a significant one.
We want to help you take some of the dread and anxiety out of tax deadlines. Setting up a year-round planning strategy will do just that.
Are You Using the Right Business Structure for Your Dental Practice?
The business structure you use – sole proprietor, LLC, etc. – has tremendous impact on how your dental practice operates and pays taxes.
A business structure is simply an organizational framework. The IRS requires you to select one for your company, since this designation will determine the tax forms you’ll file as well as who is responsible for the company’s liabilities and debts. If you’ve already started a dental practice and have been operating as one of these structures, you should occasionally re-evaluate your status, especially if you’re growing and/or adding to your organizational structure.
Here are the most common business structures and some of their attributes.
Sole Proprietorship
Whether you’re selling handmade items on Etsy or working solo in a profession like law or real estate, you’re most likely a sole proprietor (though you have other options). While you may have taken this route so you could be your own boss, there are drawbacks, including the fact that you are 100 percent responsible for your company’s liabilities.
You may also find it difficult to get financing.
Figure 1: If this IRS form looks familiar and you don’t have any employees or partners, you’re most likely a sole proprietor.
The IRS defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.” If you fit this definition, and you netted more than $400 as a self- employed person, you’re required to file a Schedule C with your Form 1040 that outlines your income and expenses. Since you are your own employer, you must pay Self-Employment Tax, the Medicare and Social Security taxes that employers pay for W-2 employees, as well as quarterly estimated taxes.
Note: Even if you have an employer who issues you a W-2 form, you must still complete a Schedule C for any side businesses you have.
Limited Liability Company (LLC)
Individuals (and other business entities) can also structure themselves as LLCs. The regulations for these vary by state, and tax obligations are a little more complex than for a sole proprietorship. We can help you decide if this is a good choice for you.
C Corporations
Businesses that choose this structure are generally larger companies with many employees. Since the company functions as a separate legal entity, no individuals are subject to personal liability. They file the IRS Form 1120 (among other documents) instead of a 1040, and they can sell stock in the company to raise revenue. On the downside, C Corporations have complex administrative requirements. They must pay corporate tax, and their shareholders pay tax on dividends on their own returns.
Partnerships
Partnerships – and there are multiple types – are also very complex entities. They consist of two or more individuals who are not considered employees, but who are personally liable for the partnership’s debts and other obligations. The partnership itself is not required to pay income tax like corporations do. Rather, they file a Form 1065 to report income, deductions, etc. Profits or losses are then “passed through” to the partners, who file Form 1040 as if they were sole proprietors, but who must attach a Schedule K-1 to the 1065.
You can see from this brief discussion that the business structure you select has enormous influence on your income tax obligations and your personal liability. Before you make a decision, or if you’re considering changing an existing structure, let us walk you through all of the possible implications for your practice.
Does My Business Need to Collect Sales Tax?
Small dental practices face numerous hurdles along the way to success. At the top of the list is navigating the various local, state and federal taxes obligations the business incurs. Neglecting to file taxes that the company owes can cause a fledgling business to fail before it even gets off the ground. Among the potential tax obligations that a dental practice may incur is the requirement that the business collect sales tax. Calculating the amount of sales tax due is complicated. However, before a business gets to that point it must decide whether or not it is even required to collect the tax, and if so at what rate.
Sales tax laws and rates vary from one state to the next, and sometimes from one city to the next within the same state. In addition, the rates are subject to change, and do change on a regular basis. If you deliver products or services to people in a state within the United States in which your business has any type of physical presence, you may need to collect sales tax if that state imposes a sales tax.
Almost all products that are sold on a retail level are taxed, assuming the state in question collects sales tax. Some of the important exceptions include food, prescription drugs, animal feed and products that are intended for re-sale. Services are much more complicated. Some states exempt all services while others only exempt some services.
The requirement that your business has a “physical presence” in the state also leads to much confusion. A “physical presence” does not just mean an actual brick and mortar office. A call center, sales agents, warehouse or other “presence” in the state can create the legal nexus required to trigger the sales tax obligation.
If you are in doubt about your situation, feel free to call our office. We’d be happy to help you through the process.
Business Structure Basics for Dentists
If you’re starting a dental practice or altering the framework of your existing one, be sure to choose the correct business structure and file the right income tax forms.
We don’t have to tell you how many decisions you have to make when you start a new business, or when your existing company changes in significant ways.
The most important issue you have to settle in terms of income taxes is your business structure, which provides answers to three basic questions:
- Who is the company owned by?
- How does the company distribute profits?
- How are management tasks distributed?
You’ve heard their names a lot in the past, but you may not have known what great significance they would have for you as a business owner. Each has its own set of attributes, and each requires a different set of IRS tax forms and schedules.
Here’s a look at these options.
Sole Proprietor: This is fairly self-explanatory. Do you own an unincorporated business by yourself?
Limited Liability Company (LLC): You can be considered an LLC even if you are the only person involved in the business, but there is no maximum number of “members.” Each state establishes its own regulations for LLCs, so you’ll need to do some research if this is the structure you choose. We can help with this.
You’ll be treated by the IRS as either a corporation or a partnership.
Partnership
If you and one or more other individuals contribute to the business (money, property, skills, etc.) and share in both profits and losses, the IRS considers you a partnership. Partners are not considered employees, and the corporation does not pay income tax, though it’s required to file an informational return outlining income, deductions, etc. Profits or losses get “passed through” to the partners, and they must include information about their share on their own tax returns.
Corporation
Rather than being called “partners,” the participating individuals in a corporation are called “shareholders,” individuals who exchange money or property or both for capital stock. There’s actually a double tax involved in this type of business entity. The corporation pays taxes on profits, and then the shareholders are taxed when they receive dividends.
S Corporation
S Corporations avoid double taxation by passing through income, losses, deductions and credits to their shareholders, who include this income and loss on their personal tax returns – at their individual income tax rates. S Corporations must:
- Be domestic corporations
- Consist of “allowable” shareholders (i.e., individuals and some trusts and estates, but not partnerships, corporations or non-resident alien shareholders)
- Have a maximum of 100 shareholders and only one class of stock
- Not be an ineligible corporation, like some financial institutions and insurance companies
These are very general descriptions of the most common business structure classifications. If you’re deciding for the first time which you should choose for your dental practice, or if your company is planning a major organizational shift that will necessitate changing your business structure, we’ll help you explore the options and help you determine the most appropriate entity type.
What You Need to Know About Estimated Taxes
Dentists, keep in mind that it’s not just self-employed individuals who are required by the IRS to pay estimated taxes.
There are numerous advantages to being self-employed. The top benefit that most full-time, must-report-to-the-office employees most envy the most is your ability to establish your own work schedule. You don’t have the commuting expenses, nor the hassle. No endless meetings with co-workers, and no dealing with office politics.
Self-employment has one major disadvantage, though: the self-employment tax. One of the benefits of being a W-2 employee of a company is, well, the W-2, which documents how much you paid into Social Security, as well as the big chunk your employer kicked in.
Others Owe, Too
But estimated taxes are not just for the self-employed. They’re owed by anyone who has at least some income that isn’t subject to withholding by an employer. For example, if you receive interest or dividends, rent, or income from selling an asset, you are required to pay estimated taxes.
Figure 1: The IRS establishes a payment schedule for your estimated tax payments.
In addition, if you’re not deducting enough income tax deducted from your salary, pension, or other income, you’re obligated to send the IRS a payment four times a year.
This is why it’s so important that you enter the correct number of allowances on your W-4 (and even add an additional amount if necessary) and that you track all income.
Failure to submit enough income tax dollars prior to filing your 1040 – and by the IRS’ scheduled deadlines – will result in penalties, even if the IRS owes you a refund.
How to Pay
The form you use to submit your estimated tax payments depends on what type of business entity you are. If you are a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you’ll need to make quarterly estimated payments if you think you will owe $1,000 or more (after you subtract withholding and refundable credits) or more come filing time. You would use the Form 1040-ES (Estimated Tax for Individuals) to calculate and pay. Corporations should use the Form 1120-W (Estimated Tax for Corporations) if they expect to owe $500 or more when they file.
If you are sending a check or money order, you can fill out and print the vouchers included at the end of Form 1040-ES on the IRS site.
Figure 2: If you are sending a check or money order to make estimated payments, you can use these.
There are multiple ways to pay estimated taxes electronically, either by credit or debit card, or by withdrawal from a bank account. They’re listed here, and they include EFTPS (the Electronic Federal Tax Payment System), a free service provided by the U.S. Department of the Treasury.
As Always, Exceptions
There are some individuals and businesses to whom these mandates don’t apply. Farmers and fishermen, as well as some household employers and higher-income taxpayers have different rules that are explained in the Form 1040-ES instructions.
Also, you’re not required to pay estimated taxes if:
- You were a U.S. citizen or resident alien for all of the previous year, and
- You had zero tax liability for the full 12 months of the previous year.
How to Estimate Your Estimated Taxes
That’s the tricky part, especially if you are self-employed or for some other reason don’t know for a fact how much you’ll owe in income tax for the current year. You can use the previous year’s return as a guide, but there have, of course, been tax code changes since then. And your income and deductions may well be different on this year’s voucher forms found on the 1040-ES page.
This is really an area where you should sit down with us and make a plan. This might involve running monthly or quarterly reports, creating projections, etc. These are good habits, especially if your income is unpredictable. Year-round tax planning will not only help you make those quarterly payments – it will provide a clearer view of your company’s overall financial health.
Contractor or Employee? How the Income Tax Obligations Differ
It’s a very important distinction, and one that can get you in hot water if you misclassify workers even at a dental practice.
Full-time employees of companies often look at independent contractors with envy. They can generally work whatever hours they want. They can sit at a computer, make phone calls, and create products in their jammies if they’d like. They don’t have to make up an excuse to take a mental health day, and they can run errands at times when the stores aren’t as busy.
It is true that self-employed individuals have many freedoms not afforded to those who must show up at an office or warehouse or retail outlet at scheduled hours several times a week. But where income taxes are concerned, that envy goes the other direction. Besides not getting benefits like paid time off, health insurance, and retirement plans, independent contractors bear a much heavier load, as they must kick in the money that employers cover for their full-timers.
The differences in these two types of job status may seem obvious. But even major corporations who have teams of lawyers and compensation specialists and human resources professionals have been scrutinized – and in some cases, penalized – for misclassifying workers. Here’s what you need to know as an employer.
Contractors Contract
There’s a good reason why independent contractors are called contractors: they “contract” with companies to provide services. They work for an hourly or by-the-project rate that’s arrived at ahead of time by mutual agreement. There are numerous types of professions that count independent contractors among their ranks, including artists and writers, doctors and dentists, lawyers, accountants, and, well, contractors and subcontractors.
Contractors, according to the IRS, are part of a larger group called the “self-employed.” This larger classification can also include members of a partnership and individuals who are in business for themselves (including part-time businesses).
When you employ independent contractors, you owe them payment for services rendered. Nothing more. You do not contribute a penny to their income tax obligations. They are required to file an income tax return annually and submit estimated taxes quarterly. They must also pay the IRS self-employment tax (SE tax), which consists of the Social Security and Medicare taxes that are paid by the employer when one is an official employee.
Common-Law Employees
The Internal Revenue Service’s term for an individual who is an official employee of a company is common-law employee. The IRS has established a set of criteria to help employers determine the “degree of control and independence” that exists in the working relationship.
The factors to be considered are:
- Behavioral. Can you, as an employer, control what the individual does and how he or she does it?
- Financial. How is the worker paid? Are necessary expenses reimbursed? Do you supply the tools and supplies needed to carry out the prescribed tasks?
- Type of Relationship. Is the individual entitled to benefits like health insurance, vacation pay, and/or a pension plan? Will your relationship be ongoing? Is the work that the individual will do a “key aspect of the business”?
Figure 1: Need assistance determining whether an individual is an employee or an independent contractor? Let us help you communicate with the IRS.
That seems fairly cut and dried, but believe it or not, it’s sometimes difficult to make a clear distinction. Some factors may point to an employer-employee relationship, while others may signal that the individual is an independent contractor.
The IRS has a very complicated form that you can fill out to determine the status of an individual. If you feel you need direction in this process, let us help you. Doing this incorrectly can lead to problems that you shouldn’t have to face.
Age Has Its Privileges: Income Tax Considerations for Seniors
By the time you turn 65, you’ve probably already started enjoying some benefits reserved for senior citizens. Restaurants, exclusive living communities, entertainment venues and many other businesses start offering discounts at 55.
You may have already retired from your position in the dental industry and/or started to draw Social Security. Your health care benefits will change significantly on your 65th birthday as you enroll in Medicare.
And what about income taxes? Yes, you still have to file and pay income taxes. Your income is still considered taxable unless it is exempt for some reason. At 65, you may still be receiving compensation for services or some other kind of business income, but the bulk of your money may be coming from sources like rents and royalties, interest and dividends, property sales, and estates and trusts.
Much of your tax preparation will be the same for the year you turn 65, but some things will be different. We’d be happy to go over these in detail at any time. The sooner the better, actually, if 2014 is the first year you’ll be filing as a senior. Then we can start making plans now for any adjustments that might fall in your favor.
Here are some of the areas in which your tax return may be a little different when you turn 65 and/or retire:
Deductions
If you are 65 or older, you can take a higher standard deduction than you previously did. Note: The IRS considers you 65 the day prior to your actual 65th birthday.
Retirement Plan Distributions
There are so many different kinds of distributions, and the filing requirements are all so different, that you should really sit down with us before you start receiving them. That way, you’ll be able to make at least some rough income and expense projections (if you haven’t already done so as a part of an overall retirement plan). The IRS has strict, complex rules here, and you’ll want to stay in compliance to avoid any penalties.
Estimated Taxes
Whether or not you paid estimated taxes when you were working in your dental practice, it’s possible you’ll be required to pay them in retirement. Providers generally withhold taxes on pensions and annuities, but if you end up owing money when you file, you may be required to pay estimated taxes (unless you can adjust your withholding to cover the shortfall).
Social Security
It’ll be nice to have another steady, reliable income stream, but your Social Security benefits will be taxed. If you opt to not have taxes withheld from your Social Security payments, you’ll either have to compensate for them elsewhere or pay estimated taxes.
Medicare
Medicare benefits are not considered income.
Start Now
Gone are the days when a large portion of the population worked for the same company for decades and retired with a nice employer-subsidized pension. 401(k)s, which are portable and only partially employer-subsidized, are replacing that model.
According to one source, one out of four individuals younger than 65 is not saving money for retirement at all. If you fall into this group, or if you’re in the even larger group that is saving but unsure they’ll have enough to retire, you owe it to yourself and any heirs you may have to start now, no matter how minimal your contributions.
We’d be happy to look at your current financial situation and hear about your retirement goals and dreams. Together, we can start piecing together a plan that will give you more confidence in your ability to retire young enough to enjoy your senior years.
Severance Pay is Taxable
When you lay off employees, severance pay is often a part of the deal. According to the United States Department of Labor, this pay is not required under any circumstances. However, many employers choose to offer severance pay in order to ease the transition into unemployment or a new job.
Unfortunately, even though severance pay is not a typical wage, the Supreme Court says it is still subject to the same payroll taxes as any other payment made to employees.
Taxability of Severance Pay
Like most other types of employee compensation, severance pay is subject to income taxes after it is received by the employee. However, because these benefits aren’t paid to employees for a specific period of hours worked or service provided, some employers have questioned whether severance pay should be subject to payroll taxes.
According to Forbes, this issue made it all the way to the Supreme Court after two cases tried in lower courts ended with conflicting decisions. In the end, the Supreme Court ruled that all severance pay is taxable under the Federal Insurance Contributions Act.
Applicable Taxes
Because of this recent ruling, employers must continue withholding payroll taxes from severance pay, as well as paying their portion of these taxes to the IRS. Payroll taxes include both Social Security taxes and Medicare taxes. According to the IRS, the current Social Security tax rate is 12.4 percent (6.2 percent from the employer and 6.2 percent from the employee). The current Medicare tax rate is 2.9 percent (1.45 percent from each party).
If you have any questions about severance pay and how it may affect you as a dental practice owner or employee, please don’t hesitate to contact us.
What to Do if Your Tax Refund Check is Stolen or Lost
Whether your tax refund check was lost or stolen, swift action is the best course of action to handle the situation. The longer you wait, the more difficult it becomes for the IRS to track the check and get your money to you. These are the steps you need to take.
Lost Refund Checks
Lost checks are, indeed, frustrating, but it does happen. The first step you need to take is to contact the IRS by calling 800-829-1954. If your return was married filing jointly, however, you must choose to speak with an agent rather than going through the automated system to make the claim.
At this point, the IRS will issue a Taxpayer Statement Regarding Refund form (Form 3911), which will begin the replacement process.
Once the missing refund has been processed and the check cashed, you will receive a claim package including a copy of the check from the Bureau of Fiscal Services. The IRS will examine both the signature on the check and the claim before deciding whether to process an additional refund. The review process may take up to six weeks.
Stolen Refund Checks
Before you panic believing the check has been stolen in the mail, you should call 800-829-4477 to verify that your refund has, in fact, been issued and mailed to you. You will need to know your social security number and the exact amount of the expected refund.
If your check has been stolen, call the number above, and provide the information required. You must typically wait 28 days from the date the check was mailed in order to file a claim, once you do, Uncle Sam can begin the process of re-issuing your refund.
If you have questions or concerns about your options if your tax refund check has been lost or stolen, your accountant is available to walk you through the actions you should take next.
The New Form 1095-A: Reporting Health Insurance Coverage
For the first time, all taxpayers must include information about their health care coverage to the IRS on their 2014 Form 1040. Another year, another tax form or two.
The year 2014 was the first tax year that the Individual Shared Responsibility Provision (SRP) of the Affordable Care Act (ACA) went into effect. That means all taxpayers were required by law to have had minimum essential coverage for all 12 months, which includes:
– Government-sponsored programs like Medicare
– Employer-sponsored coverage
– Individual coverage purchased through the Health Insurance Marketplace (either
– HealthCare.gov or your state’s exchange) or directly from an insurance company, or
– Grandfathered health plans (some that existed before the ACA was passed and have not changed since)
If you have such health coverage, all you have to do is check the “Yes” box on the new line 61 on the 2014 Form 1040.
Figure 1: The 2014 IRS Form 1040 now asks about your household’s health coverage.
A New Form
If you bought a plan through the Health Insurance Marketplace, you should have received an IRS Form 1095-A by January 31, 2015. If you have not received it by now, contact the marketplace where you signed up for coverage; don’t contact the IRS.
The Form 1095-A, which is issued by the marketplace, contains several types of information, including details about you, your policy, household individuals covered, your monthly premiums and any advance credit payments you received (this would have occurred during enrollment).
Premium Tax Credits
The ACA built in provisions for individuals who could not afford even a lower-tier health insurance policy – Premium Tax Credits (PTC) – to ensure that all taxpayers would be able to buy coverage. This formula involves comparing your income to the Federal Poverty Line (FPL). Your marketplace should have notified you about your PTC status.
However, if your household situation changed between the estimates made during the enrollment period and your IRS income tax preparation (due to divorce, income increase or decrease, etc.), you’ll need to see if you are still eligible. To do so, fill out a Form 8962.
Figure 2: You’ll need to complete a Form 8962 to see if you can claim the Premium Tax Credit.
Basically, the IRS is trying to calculate the amount of tax credit you should receive.
If there is a difference between any advance credit payment made and the new, calculated Premium Tax Credit, you may receive a refund – or be required to repay the excess.
Warning: The Form 8962 is a complicated new form, so there is bound to be some confusion. You may want our help with it.
Exemptions and Penalties
If you did not have health insurance in 2014, the IRS will assess what’s called an individual shared responsibility payment. In other words, a penalty. For tax year 2014, that payment would amount to whichever of these is greater:
– One percent of the household income that is above the tax return filing threshold for the taxpayer’s filing status, or
– The family’s flat dollar amount, which is $95 per adult and $47.50 per child (under age 18), limited to a family maximum of $285.
There are exceptions, though. For example, you may be granted an exemption if your household income is below the return filing threshold or if there was only a short coverage gap. If you have received an exemption, you’ll need to complete and file a Form 8965 with your 1040.
Note: The marketplace grants certain exemptions, while others are claimed on your tax returns. It depends on the exemption. If you think you are entitled to an exemption and have not been given one, please contact us right away.
Most taxpayers will simply be able to put a check in the Full-year coverage box on line 61 of the 2014 1040. But if you bought a policy through the Health Insurance Marketplace – either federal or state – for 2014, we strongly urge you to contact us.
There will undoubtedly be many taxpayers puzzling over the ramifications of this new ACA provision. You don’t have to be one of them.
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